Editorial: Aussie windfall taxes 2.0

Yes, they’re back. And probably here to stay this time. Rebounding from the June 2010 defeat of its proposed 40% “Resource Super Profits Tax” (RSPT) on miners, Australia’s centre-left government has spent the past year developing a more palatable version of its windfall tax.

Called the “Mineral Resource Rent Tax” (MRRT), the proposed legislation is newly open to public comment and has become the talk of the mining scene Down Under.

The MRRT is modeled on Australia’s existing “Petroleum Resource Rent Tax,” and is due to come into force in July 2012, taxing at a 30% rate the “super profits” of iron ore and coal mines in Australia. (The RSPT was on all mined commodities).

These super profits would kick in when profits rise above the long-term government bond rate plus 7%. At the same time, there would be a 25% “extraction allowance” that would result in only 75% of taxable profits being subject to the MRRT, and the first A$50 million in profits would be exempt.

The introduction of the RSPT by then-Prime Minister Kevin Rudd and his treasurer Wayne Swan led to a firestorm of opposition from miners, right-leaning Liberal Party members, and governments of some mining-dependent states. Aussie mining stocks were pounded hard, and it rankled the mining industry that the government did not consult with it before unveiling the tax proposal.

The backlash helped lead to Rudd’s shocking ouster in a caucus revolt in June 2010, and his replacement by Julia Gillard as Labor Party leader and prime minister.

In promoting its latest windfall-tax proposal, Gillard’s government says that “increasing the tax on high-profit resource projects will allow us to redistribute the benefits of extracting Australian resources across the whole community,” and that it is “committed to a strong, sustainable Australian resource sector.”

The government established its “Policy Transition Group” in August 2010 to study the MRRT proposal and provide it with reports in December 2010. That led to the government adopting the group’s 94 recommendations as it further crafted the tax in March 2010. And this time around, the government made some effort to consult with mining companies – even if only the largest ones.

The full details of the MRRT are still forthcoming, but the only small benefit to miners appears to be that small mineral exploration companies would be better able to recoup losses on unsuccessful ventures. Overall, though, the MRRT discourages iron ore and coal exploration in Australia, as it reduces the payoff of any profitable find.

The reaction to the MRRT by Australia’s mining industry is pretty much a replay of what happened with the RSPT, minus many of the players who don’t have big iron ore or coal mines in the country. Mining unions and other labour groups, though, support the new tax.

The hardest-hit companies would still be the three biggest miners in the country: BHP Billiton, Rio Tinto and Xstrata. They would see the effective tax rates on their Australian mines climb from 30% to about 40% – a big chunk of change, but still lower than the punishing 58% under the RSPT. The two biggest North American-based companies to be walloped by the MRRT are Cliffs Natural Resources and Peabody Energy.

(North American-based miners active at non-coal or iron ore mines in Australia, and thus exempt from the MRRT, include Barrick Gold, Newmont Mining, New Gold, First Quantum Minerals, Coeur d’Alene Mines, Cameco and Northgate Minerals.)

This limiting of the tax to iron ore and coal profits also lifts a considerable burden off the proposed mega-expansion of the Olympic Dam uranium-copper-gold-silver mine in South Australia.

But there’s no way around it: the MRRT is a huge tax hike on miners that will bring in perhaps an extra A$11 billion to federal government coffers in the first three years.

However, there is little sympathy among the general population in Australia for the country’s multinational, highly profitable iron ore and coal miners, so it’s easy to predict that this tax is going to stick.

Whereas the mining industry showed a unified front in battling the RSPT and funded a large anti-tax ad campaign, the split this time is exemplified by the reactions of two of Australia’s richest mining executives: billionaire Andrew Forrest of Fortescue Metals, with his characteristic bluster, has called the MRRT “economic vandalism,” while Aquila Resources chief executive Tony Poli, worth an estimated $700 million,  told The Australian that it is “not unreasonable for mining companies to pay a bit more tax.”